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How an Accounting Decision Launched a Six Year Federal Criminal Case

Prabhat Goyal is the former CFO of Network Associates, Inc., the company that manufactures McAfee antivirus software. In 2004, he was charged with 15 counts of securities fraud, false statements, and false filings.  The charges stemmed from a strategic decision Goyal had made about accounting.  Goyal had opted to use “sell-in” accounting,  which allowed for revenue to be recognized when the company’s products were shipped to the distributor, rather than “sell-through” accounting, which would have deferred the recognition of revenue until the distributor had sold the products. Goyal was convicted in 2007, and Judge Susan Illston sentenced him to one year in prison.

For the conviction to stand, however, the government needed to demonstrate to the Ninth Circuit Court of Appeals that the revenue difference between sell-in and sell-through accounting would have been “material.” The government made virtually no effort to demonstrate this. The appellate court overturned all 15 convictions last week, finding that “no reasonable juror could have found Goyal guilty beyond a reasonable doubt of any of the charges.” The Court even went so far as to criticize the government for its “total failure of proof.”

Many bloggers have noticed Justice Alex Kozinski’s passionate concurrence in the case.  In the concurrence (which appears below with citations omitted), Kozinski excoriates the government’s case and the manner in which it frays the distinction between criminal law and civil law:

“This case has consumed an inordinate amount of taxpayer resources, and has no doubt devastated the defendant’s personal and professional life. The defendant’s former employer also paid a price, footing a multimillion dollar bill for the defense. And, in the end, the government couldn’t prove that the defendant engaged in any criminal conduct. This is just one of a string of recent cases in which courts have found that federal prosecutors overreached by trying to stretch criminal law beyond its proper bounds.

‘This is not the way criminal law is supposed to work. Civil law often covers conduct that falls in a gray area of arguable legality. But criminal law should clearly separate conduct that is criminal from conduct that is legal. This is not only because of the dire consequences of a conviction—including disenfranchisement, incarceration and even deportation—but also because criminal law represents the community’s sense of the type of behavior that merits the moral condemnation of society When prosecutors have to stretch the law or the evidence to secure a conviction, as they did here, it can hardly be said that such moral judgment is warranted.

‘Mr. Goyal had the benefit of exceptionally fine advocacy on appeal, so he is spared the punishment for a crime he didn’t commit. But not everyone is so lucky. The government shouldn’t have brought charges unless it had clear evidence of wrongdoing, and the trial judge should have dismissed the case when the prosecution rested and it was clear the evidence could not support a conviction. Although we now vindicate Mr. Goyal, much damage has been done. One can only hope that he and his family will recover from the ordeal. And, perhaps, that the government will be more cautious in the future.”

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